A fresh lawsuit filed by New York's top government prosecutor is a reminder
that the financial crisis is still haunting Wall Street.

The $26m (£16m) or so that Bear Stearns paid for Encore Credit Operations in October 2006 was not frontpage news. If shareholders of the US investment bank noticed the deal, approval would have been their most likely response.

The purchase of Encore Credit, which arranged mortgages for Americans with poor credit histories, strengthened Bear Stearns’ seat at the only table that really mattered on Wall Street in late 2006.

Like rivals at Merrill Lynch, Citigroup and Bank of America, bankers at Bear Stearns were pocketing millions of dollars by taking US mortgages, packaging them into bonds and selling them to investors around the world. The business drove profits at Bear Stearns to a record $2.1bn in 2006, saw then chief executive Jimmy Cayne rewarded with a $15m bonus and had helped the bank’s share price triple over the previous five years.

This aggressive expansion into the mortgage business also explains why lawyers at JP Morgan Chase, which bought Bear in the spring of 2008, are this week reading a 31-page lawsuit from New York’s top prosecutor.

Eric Schneiderman, who was elected New York attorney general almost two year ago, alleges that Bear Stearns systematically mis-sold mortgage-backed bonds to investors in the pursuit of profit. Buyers of the bonds lost $22.5bn in 2006 and 2007 alone as US house prices fell, according to the charges which Schneiderman announced at the Department of Justice in Washington on Tuesday.

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Schneiderman wants unspecified damages from JP Morgan, which says it will contest the allegations that cover the two years before it acquired Bear.

Many of the allegations echo those already made about banks’ practices in the run-up to the financial crisis. But the charge sheet paints a picture of the fevered scramble to ensure a supply chain which moved mortgages from across America to the desks of sales staff on Wall Street, would never run dry.

The volume of mortgages that Bear Stearns packaged and sold soared from $21bn in 2003 to $69bn just three years later, according to a suit that reveals the pressure exerted on a supply chain that Bear, like Wall Street competitors, had assembled.

Staff at Clayton Holdings, the company Bear hired to monitor the quality of the mortgages that went into the bonds, were instructed “not to get married to the loan,” while checking them, the suit alleges. In another email cited, an employee at Clayton writes: “Have 1,594 loans to do in 5 days. Sounds like fun? NOT!”.

The suit also arguably sets a new low for bankers’ descriptions of the products they sought to sell investors, with one Bear Stearns executive labelling a mortgage-backed bond a “sxxx breather.”

It is the sort of language that Schneiderman is hoping still resonates with Americans more than four years after JP Morgan snapped up Bear Stearns for just over $200m. Bill Cohan, whose book House of Cards details Bear’s collapse, is not convinced. “I don’t think the American public can be shocked anymore by profanities from bankers selling products they should not have been,” says Cohan. He wonders, though, why New York authorities have not bought a criminal suit given the allegations of fraud.

What is clearer is Schneiderman’s determination to investigate alleged wrongdoing before the crisis. The New York attorney general was one of a handful of state representatives who for months resisted agreeing to a $25bn settlement with banks over the abuse of repossession practices for fear it would prevent him examining Wall Street’s behaviour before the crisis.

With the presidential election just over a month away, experts say it is hard to escape the politics of the latest legal missile. The suit is the first bought by the Residential Mortgage-Backed Securities Group, part of the Financial Fraud Enforcement Task Force that President Barack Obama established in January.

“We have an election going on and the attorney general will want to be seen to be doing good,” says Roy Smith, a professor of finance at New York University. Cohan believes JP Morgan is likely to settle because no bank wants to face a trial.

Wall Street banks are throwing their cash behind Mitt Romney. But even if the Republican challenger reverses the latest polls and wins on November 6, this week’s lawsuit suggests life will not necessarily get any easier for the banks.

Schneiderman and Ben Lawksy, head of the newly established Department of Financial Services in New York, have shown an appetite to go after banks. 2007 saw bumper profits and record bonuses. Five years on, some of the practices that drove the boom are still haunting Wall Street.